To an economist, ‘capital’ doesn’t mean money!
(Introduction to Economics, Lesson 18)
If you want to produce a product — it could be a car or a simple chocolate bunny — there are many things you are going to need in order to get the job done. These ‘things’ are often divided into three broad categories — Land, Labour and Capital. These are known as the ‘factors of production.’
‘Land’ essentially refers to all natural resources. ‘Labour’ refers to people, whether they are workers or managers. Capital, however, is not what you might think. It’s not money! ‘Capital’ actually refers to the man-made things that aid in the production process. It could refer to something as simple as a hammer or a screwdriver — or it could refer to a huge factory.
If this sounds a bit Business-Studies-like — just making up terms for things to make ourselves sound clever — it’s actually much more important than that. You see, what’s particularly useful about this system of categorising the factors of production, is that it highlights the special nature and importance of capital and the role of capital in determining the economic welfare of our entire society.
Here’s the critical thing: We can, in theory, increase the ‘land’ resources available to us. We could, for example, invade France. Or, we might search for and discover oil. Often, however, we’re rather restricted in what we can do to gain more ‘land’ without taking it away from other people. Even if we discover and make use of a new oil field, we are effectively taking those resources away from future generations.
We can increase the amount of labour available to us. We can encourage people to have more babies, but that might not increase the actual workforce for 18 years or more. We could encourage immigration — but having a more crowded country may bring more problems than benefits.
So, our options in terms of boosting the availability of land and labour can often be rather limited. Capital, however, is something we can really do something very substantial about. We can build new factories so that next year, we are able to build products we weren’t able to build this year. We can build better transport systems, so that, next year, people waste less time sitting in traffic jams. We can build new laboratory facilities, so that next year we make more new scientific discoveries than we made this year.
Perhaps, most importantly of all, we can increase our stock of human capital. ‘Human capital’ refers to the skills, knowledge and understanding that people have built up through education, training and experience. These are, in a sense, ‘man-made,’ as they were produced by teachers and trainers and by the efforts of their students and trainees — and you end up with ‘man-made’ skills, knowledge and understanding that aids in the production process and in future scientific and technological achievements. Increasing and improving our capital stock is an area where we can make a huge and lasting difference to the welfare of our society.
The act of increasing our stock of capital, whether this involves building roads, laying new fibre-optic cables for faster internet access or educating our children, is referred to simply as, ‘investment.’